An Interesting Look At Inflation

[ladelfina]

1997-2007.. that's the period of the big housing price run up. CPI uses owner-equivalent rents, not actual housing cost; rent inflation has been more normal. People have been spending way more for houses in dollars (biggest household expense, usually) compared to cars (modest expense).

 

[cute fuzzy bunny]

Isnt that whole rent thing sort of a self fulfilling prophecy?

Rents are more tied to wages than home prices. Renters are cash flow dependent and simply cant pay more than a fair housing slice of their paycheck. Raising rents to index home prices results in empty rental units. Eventually though a homeowner who cant rent the property at a fair enough price will sell it. Eventually the pool of available rental units will dry up forcing more renters to buy and rents to rise.

It just takes 5-6 years for all of that to happen.

 

[Independent]

Maybe I'm reading something wrong on that chart. Looks to me like the male inflation adjusted earnings in 2000 were 45,443 and dropped to 43,317 by 2008, while womens earnings gained just a few dollars in the same time period.

Seems like a 5% loss to inflation over that 8 year period for men, no change for women.

Not exactly "wages staying ahead of the CPI" from what I can see.

If wages (for men at least) are losing ground at a little under 1% a year, and theres a variance between CPI as measured for an urban worker and a particular person of another .5%-1%, then workers in the last decade are seing a 7-10% loss to inflation in their spending power, yes?

Seems to me that some hedging or investments with excess return (and risk) might be prudent.

I remember Ted used to buy oil futures as a way to mute this, as he expected oil prices to continue to rise and drive up a lot of other costs with them.

Yes, the chart shows falling male incomes from 2000. In fact, you'll note that 2000 was the highest year of all. And also note that the last year in the table is 2005, I don't know of a source for 2007 (though you can get 2006 here: PINC-03--Part 136)

I wanted to use a 10 year period because the longer period highlights the problems with shadowstatistics.

If you're saying that workers have been losing real income at the rate of 1% or 2% per year since 2000, I'm not going to disagree. You can get that result by looking at the gov't numbers and assuming there is a slight error in the CPI.

However, shadowstatistics says they were losing 7% or 8% per year, compound, for at least a decade. That's way out of the ballpark.

 

[Independent]

1997-2007.. that's the period of the big housing price run up. CPI uses owner-equivalent rents, not actual housing cost; rent inflation has been more normal. People have been spending way more for houses in dollars (biggest household expense, usually) compared to cars (modest expense).

Yes, it's possible that families were spending a higher percent of their incomes on mortgage payments in 2007 than in 1997. If so, they had to spend a lower percent on something else.

The article that started this thread states that the CPI grossly understates the real inflation rate, and has been for a long time. It quotes shadowstatistics as an authority for this claim.

I'm not sure how your statement about spending patterns connects to the CPI claims in the article.

 

[cute fuzzy bunny]

I have no particular interest in shadowstatistics. I think its fine if they want to show different ways of measuring inflation. Its just another perspective.

What gets my ER panties in a bunch is getting a good handle on how price changes are effecting my cost/quality of life.

Nobody's web site or government chart is going to be a lot of help with that, nor are any investment products indexed to a figure generated from a group of people that have very little in common with me.

I hadnt seen numbers from the reagan era set of calculations, but I know the clinton changes produces some profound differences...right or wrong...in measured CPI.

Probably not enough to make a problem if you're 70 and just hanging in there for another 12-15 years. Big problem if you're 40 and looking at another 40.

 

[RonBoyd]

... getting a good handle on how price changes are effecting my cost/quality of life.

Nobody's web site or government chart is going to be a lot of help with that,...

Is this close to what you mean?

Personal CPI Calculator

Do You Know Your "Personal" Inflation Rate? - InvestorGuide University

Calculate your own personal inflation index with this formula: Financial News - Yahoo! Finance

Or am I way off track?

 

[cute fuzzy bunny]

Just like that.

That last one is really good stuff.

 

[Notmuchlonger]

We were at 3.47% last year.

 

[igsoy]

So I'm right back to the same argument, if shadowstatistics is correct, we're buying 40% less real stuff (like 40% fewer cars) than 10 years ago. He's wrong.

You've said this several times, but isn't it true that there has been an unprecedented cash-out refi upswing over the last 10 years of the housing boom? Isn't it possible that these people aren't buying any less due to loss of buying power from their salaries because they are just making up for it by consuming their equity? Now that the equity ride is over, maybe they can maintain their high life for another couple of years via credit cards, but after that the party will have to end, and the economy is really gonna tank when people finally are forced to buy 40% less stuff...

 

[bots2019]

Well lets see...gas more than doubled, so did electricity. My cable bill (if I were still on cable) has close to doubled. My high speed internet has doubled. Milk, meat, eggs and a number of other food products have more than doubled in just the last few years, you know...because we converted all our feed corn into fuel and eliminated our dependence on foreign oil? :

Homes in my area even after the recent haircut are still about twice what they were a little over 10 years ago.

So theres some precedence to say that in many areas like utilities, food, transportation costs, housing costs and others...a doubling has certainly occurred.

Of course, many electronic items we dont really need are cheaper or about the same.

Sure some items have doubled, but overall Certainly hasn't been the case for me. FWIW, I bought my house in 2001 and it's currenly worth about 20-25% more, not everybody lives in SoCal or the NE! Other significant items, such as automobiles have increased at a reasonably slow rate.

As Independent has pointed out, any method that shows 10% average over the last 7 years seems a little off. CPI is obviously too low. Seems clear the truth lies somewhere in the middle.

 

[mathjak107]

the items we buy every day namely fuel food and heat are out of sight.

even houses as much as they have fallen demand a larger percentage of ones income to buy.

the cheap imports in clothes and other low cost crap from china are horrible. good stuff still costs more then it ever did.

my true cost of inflation is the pizza index, i dont know why it works but for the last 30 years it seems to be the most accurate indicator...

 

[RonBoyd]

Just like that.

That last one is really good stuff.

I noticed that the "last one" was originally located at MarketWatch:

Calculate your own personal inflation index with this formula - MarketWatch

That is where I originally started my investigation of this subject back in February. You should take a look at it because of the comments, not all of which are positive. (I have not looked at the Yahoo comments.)

Anyway, among my notes is this valuable data:

http://www.bls.gov/cpi/cpiri2006.pdf

(from this page - Consumer Price Index Home Page)

You need that to fine-tune your calculations

 

[cute fuzzy bunny]

not everybody lives in SoCal or the NE! Other significant items, such as automobiles have increased at a reasonably slow rate.

Well now, whose fault is THAT?!?

MOVE!

 

[cute fuzzy bunny]

You should take a look at it because of the comments, not all of which are positive.

I think its at least good enough to get people started on seeing how inflation is measured, what things go into it, and what the weightings are. Anyone with a good budget and some historic spending numbers can poke a few things in there and see what they get.

At least they're engaged in getting a ballpark on what inflation is doing to them and how they can reduce its effects.

Which beats the pudding out of saying you dont need to know, cant find out, or shouldnt even think about it. Definitely an improvement over saying the CPI is "good enough", even though the people who turn it out disclaim right up front that its an average and not THE measure of inflation.

When people will jump through hoops to get an extra .25% off their expenses or on their money markets, maybe its a good idea to find out whether your budget is inflating at 2%, 4% or 6%.

 

[RonBoyd]

When people will jump through hoops to get an extra .25% off their expenses or on their money markets, maybe its a good idea to find out whether your budget is inflating at 2%, 4% or 6%.

I couldn't agree more. Well put.

 

[bots2019]

Well now, whose fault is THAT?!?

MOVE!

(sigh) if only it were that easy... at least the snow's gone now, spring is on the way

 

[cute fuzzy bunny]

Hey man, I've had to mow my lawn about 12 times already. Spent half the day yesterday in the pool with my son getting some preliminary skin cancer!

 

[bots2019]

Hey man, I've had to mow my lawn about 12 times already. Spent half the day yesterday in the pool with my son getting some preliminary skin cancer!

Ha, just think of the fuel costs I've saved already on mowing, keeping my 'personal rate of inflation' down

Heh, every bit counts.

 

[cute fuzzy bunny]

Yeah but its so nice here all the time, we never have to go on a vacation to somewhere warm!

Plus its a $45 pool!

 

[Notmuchlonger]

Get goats to eat your lawn! Then you can milk them for goat cheese and milk. Which of course will save you food wise. Then when it gets all old goat steaks! Eureka!

 

[bots2019]

Good point. I find that I need at least one warm weather excursion a year to keep my sanity (and even then it's a tenuous sanity!).

I guarantee once I ER I'll be somewhere where I get my fair shot at a winter sunburn. Now if anybody has a couple extra million lying around I'd be happy to give it a shot in the near future.





Mmm... goat chese

 

[Khan]

Get goats to eat your lawn! Then you can milk them for goat cheese and milk. Which of course will save you food wise. Then when it gets all old goat steaks! Eureka!

I would do so if I did not live within city limits.

 

[cute fuzzy bunny]

I've read too many stories about people getting too attached to their goats.

A few years ago I was looking at a big parcel of fenced land (around 20 acres) with a tiny house on it and thinking I could squeeze into it. Only one acre was grass and trees, the rest was california natural. My plan was to get a bunch of goats to do the mowing and learn about them.

Good thing I bought the suburban house or I'd probably have a half dozen goats living in my back yard along with the plethora of dogs and cats.

 

[Notmuchlonger]

Sure destroy my dreams.

 

[cute fuzzy bunny]

Dude, if you're dreaming about goats we need to have a little chat...